The way landlords structure their property investments has been changing.
Vast numbers of property investors have been setting up limited companies to hold their buy-to-let properties.
What’s all the fuss about? Well, it mainly comes down to one thing: tax.
Over the past few years, the government has been making some large-scale changes to the way landlords are taxed. Things like the restriction of mortgage interest relief have made it harder for individual landlords to turn a profit.
A limited company provides some answers to these challenges, but is it the right choice for you?
Let’s dive in and explore the pros, cons, and key considerations.
The Rise of Landlord Limited Companies
Landlords have been flocking to limited company structures in record numbers. According to recent data, there are now over 400,000 limited companies set up to hold buy-to-let properties – that’s more than any other type of business.
So what’s behind this surge? A key factor has been the changes to mortgage interest tax relief, introduced in stages from 2017 and fully implemented by 2024.
These changes, often referred to as ‘Section 24‘, restrict the amount of mortgage interest landlords can deduct from their rental income before calculating their tax liability.
For higher-rate taxpayers, this has meant a significant increase in their tax bill. In contrast, limited companies can still deduct all of their mortgage interest, making them a more tax-efficient option for many.
Couple this with the fact that corporation tax rates (currently 19% for profits under £50,000) are lower than the higher income tax bands, and it’s easy to see why many landlords have made the switch.
But before you rush off to set up your own property company, it’s essential to understand that it’s not a one-size-fits-all solution. In the next section, we’ll look at some of the potential benefits in more detail.
Benefits of a Limited Company For Landlords
Let’s begin by taking a closer look at the benefits of setting up limited companies:
1. Tax Efficiency
One of the primary benefits of using a limited company is the potential for tax efficiency. Companies pay Corporation Tax on their profits, rather than Income Tax.
The current Corporation Tax rate for companies with profits under £50,000 is 19%, which is lower than the higher (40%) and additional (45%) Income Tax rates that individual landlords might face.
Furthermore, companies can fully deduct mortgage interest from their rental income before calculating their taxable profit. For individual landlords, this deduction has been replaced with a basic rate tax credit, which can result in a higher tax bill, especially for higher-rate taxpayers.
2. Reinvestment Advantages
When you operate through a limited company, you have more control over when and how you extract profits.
If your aim is to grow your property portfolio, you can choose to leave profits in the company to be reinvested. These retained profits will only be subject to Corporation Tax, rather than the potentially higher personal Income Tax rates.
This can make it more tax-efficient to build up funds within the company for future property purchases or improvements.
Of course, when you eventually extract these profits (e.g., as dividends), there will be additional tax considerations. But the ability to time your profit extractions can provide valuable tax planning opportunities.
3. Limited Liability
A key characteristic of a limited company is that it offers limited liability to its shareholders.
The company is a separate legal entity, and its debts and obligations are its own. If the company can’t pay its debts, the shareholders’ personal assets (like their own homes) are generally protected.
This can provide a layer of protection, especially for landlords with larger portfolios and more significant borrowing.
However, it’s important to note that lenders will often require “personal guarantees” from company directors for buy-to-let mortgages, which can negate some of this protection.
4. Succession Planning
A company structure can provide more options and flexibility when it comes to succession planning.
Transferring ownership of a company (through shares) can be simpler and more tax-efficient than transferring individual properties.
You can also set up different classes of shares with different rights (e.g., voting rights vs. dividend rights) to suit your succession plans. This can allow you to gradually transfer ownership or control to the next generation in a managed way.
However, it’s important to be aware of potential Stamp Duty Land Tax and Capital Gains Tax implications when transferring properties held in a company.
5. Professional Image
Operating as a limited company can provide a professional image for your property business. It can lend credibility and assurance, especially when dealing with larger-scale partners or investors.
Having a corporate brand can also make it easier to establish a clear identity for your business and to build trust and recognition in the market.
Drawbacks and Risks of a Landlord Limited Company
While the potential benefits of using a limited company for property investment are hard to ignore, it’s crucial to understand the drawbacks and risks as well.
1. Personal Guarantees on Buy-to-Let Mortgages
One of the main risks for landlords operating through a limited company is the requirement for personal guarantees on buy-to-let mortgages.
What is a Personal Guarantee?
A personal guarantee is a legal agreement where an individual (usually the company director) agrees to be personally responsible for a company’s debt.
In the context of a buy-to-let mortgage, this means that if the company fails to make the mortgage repayments, the lender can pursue the individual’s personal assets to recover the debt.
Implications for Landlords
This effectively removes one of the main benefits of using a limited company structure – the protection of personal assets.
Landlords need to be aware that even though the property is held within the company, they may still be personally liable for the mortgage debt.
2. Reduced Mortgage Choice and Higher Costs
Another potential drawback of using a limited company is the reduced choice of mortgage products available.
Limited Company Mortgage Market
While the number of limited company mortgage products has increased in recent years, the choice is still more limited compared to the market for individual buy-to-let mortgages.
This reduced competition can lead to higher interest rates and arrangement fees for limited company mortgages.
Cost Implications for Landlords
These higher costs can eat into the potential tax savings of using a limited company structure.
Landlords need to carefully calculate the costs and benefits to determine if a limited company is the most cost-effective option for their circumstances.
3. Increased Administrative Responsibility
Running a limited company comes with additional administrative responsibilities compared to holding property as an individual.
Accounting and Reporting Requirements
Limited companies are required to prepare and file annual accounts, as well as a confirmation statement, with Companies House. They also need to maintain accurate records of income and expenses, and file a corporation tax return with HMRC.
Professional Costs
Meeting these obligations often requires the assistance of professional accountants and tax advisers, which can add to the cost of operating through a limited company.
4. Transferring Existing Properties
For landlords who already own properties in their personal name, transferring these into a limited company can trigger tax liabilities:
- Capital Gains Tax: Transferring a property from personal ownership to a company is treated as a sale at market value for tax purposes. This can result in a capital gains tax liability on any increase in the property’s value since it was originally purchased.
- Stamp Duty Land Tax: In addition to capital gains tax, transferring a property to a company may also trigger a stamp duty land tax liability, as the company will be purchasing the property at market value.
Both of these situations demand close attention and help from a tax specialist.
Getting Professional Advice
Of course, everyone’s situation is different, and there’s no one-size-fits-all answer.
A good property tax accountant will be able to look at your current portfolio, your future plans, your other income streams, your personal financial situation, and help you figure out whether a limited company is the right vehicle for your property business.
They can crunch the numbers for you, showing you the potential tax savings (or costs) of using a company based on your specific situation. And they can help you weigh that up against the additional administrative burdens and costs that come with running a company.
At Double Point, this is exactly the kind of in-depth, personalised advice we provide to our landlord clients.
So if you’re wrestling with the decision of whether to use a limited company for your property investments, why not chat with us?
Book a consultation with us today, and let’s start optimising your property business together.
